Wall Street poker night

The Wall Street in the chapter title is not the physical street that runs "between a river and a graveyard" near the southern tip of Manhattan. The last major financial institution left there several years ago, a year before 9/11. The New York Stock Exchange and New York Federal Reserve are still nearby, but physical floor trading of equities is no longer an important part of the financial markets and the center of Fed activity has shifted to Washington. There's still a financial district downtown, but except for Goldman Sachs, the headquarters of the large firms have moved to midtown Manhattan or farther away.

In the 1980s and early 1 990s, there were plenty of high-quality poker games in the Wall Street area. Some took place in private clubs that no longer exist. Others were played in luxurious dining rooms on the premises of the big banks. The few rooms like this that survived cost cutting are reserved for customer entertainment, and it is now unthinkable to gamble on corporate property (gamble with cards, that is). In the summer, there would be games on yachts.

No doubt someone plays poker on the physical Wall Street, but I haven't been to a major game in the area for 10 years. Today, traders and other financial types who are serious about their poker are likely to play in midtown hotel rooms, private apartments or townhouses on the Upper East Side, or homes or country clubs in Westchester or Greenwich. Last night's game took place in the Tower Suite of the Mark Hotel. It's a spectacular setting with gorgeous views of Central Park and midtown. It was a rolling game, with some of the traders starting play early, about 5 P.M., while the bankers trickled in between 8 and midnight. Most people play for five or six hours. The game broke up at quarter to five the next morning, an hour after I left. The hotel is convenient for this kind of game, especially since some of the late stayers nap and shower before heading back to work without going home.

I haven't been playing much poker this summer because I've been too busy writing this book. I did attend the 2005 World Series of Poker, but only to get interviews. I didn't have the focus for tournament play, and I didn't do well when I took a seat in some side games.

A couple weeks ago, I sent drafts of the book to some of the players, so I'm gathering comments as well as poker chips. I would love for them to go on the record, but everyone refuses. It seems silly-most of them are on some kind of public record as poker players; some have won major tournaments. Most of their colleagues know they play. But Cao Chong sums up the opinion of the group that having coworkers know in general that you play is different from being identified in public as having played at a specific game. Playing in Las Vegas on vacation is not the same as playing after work in New York. You never know when exposure could come back to haunt you. I've tried to minimize the use of pseudonyms in this book-there are only three outside this chapter-but everyone here tonight will be identified by nickname. Some of them appear in other chapters under their own names.

The Players

I've known Cao Chong the longest of any of the players, over 20 years. He was one of the original Liar's Poker team described in the Flashback that follows Chapter 8. In fact, he went on to rewrite the rules of the game, civilizing it with the stipulation that everyone must challenge the last bid and share in the result. He became a very successful trader and now runs a hedge fund. He is among the best mathematicians I know. He is also writing a book on poker, but the highly mathematical kind that only 10 people in the world are going to understand when it is published posthumously; however, those 10 people will revolutionize the game.

Among the players I've never met is The Kid, a college student who won $350,000 playing online poker last year. He's here to play, of course, but also to hunt for a job. Poker has always been a way for ambitious young risk takers to prove their skills and get the attention of traders. Like everything to do with poker, it has exploded in the last few years. It used to be that students would play in serious games near their college, and someone would recommend them to someone on Wall Street who played. Today, kids show up fresh from tournament victories or online triumphs, and many have never played in this kind of private game. The Kid has-or else has the skills to fake it perfectly, which would be even better. On top of his poker and charm, he's got the IQ and education to get in. He'll probably be running a major bank in a few years. If not, he can make a living playing poker.

If you are an aspiring trader, you don't have to learn poker to get a good job. You do have to demonstrate some risk-taking aptitude. Risk management is not a hidden talent you discover miraculously when entrusted with other people's money. If you have it, it shows up young.

The mistake most applicants make is to think you have to demonstrate extreme risk-risking your life or a prison sentence. People who do that without commensurate expectation of gain are thrill seekers. What 1lis- ten for is someone who really wanted something that could be obtained only through taking the risk, whether that risk was big or small. It's not even important that she managed the risk skillfully; it's only important that she knew it was there, respected it, but took it anyway. Most people wander through life, carelessly taking whatever risk crosses their paths without compensation, but never consciously accepting extra risk to pick up the money and other good things lying all around them. Other people reflexively avoid every risk or grab every loose dollar without caution. I don't mean to belittle these strategies; I'm sure they make sense to the people who pursue them. I just don't understand them myself. I do know that none of these people will be successful traders.

The kid is not the youngest player tonight-that honor goes to Ma Liang. Cao Chong is typical of the Chinese people who used to come to Wall Street. On the day he was to be sent to the countryside, almost certainly for a life of hard physical labor and poverty, he received word that he had a place in university, if he could get there in 20 hours. He rode an old bicycle over dirt roads through an unlit night, and he made it. He went on to get a PhD in physics and then a job on a trading floor in New York. I can't imagine how he did it.

Ma Liang's life offers an extreme, and pleasant, contrast. He seamlessly connects Beijing with Hong Kong and New York, drifting easily through each without seeming to have a plan, but probably with a very subtle plan. I'm not sure what his connections are, but he seems to know everyone. He's fantastically diffident about it-he doesn't drop names; you just see him at the head table, or shaking the hand of the guest of honor, or standing off to the side of the publicity photograph. He works for a private investment company and plays poker with an unmistakably Texas accent. He declined the invitation to our last game, on September 1, 2005, but showed up unexpectedly. I later learned he was supposed to have spent the night at the White House, but the visit was canceled due to Hurricane Katrina activity. Coincidentally (I hope), Hurricane Rita hit Houston today. A lot of people in the room spent the day trying to keep in touch with partners and customers from that city. A well-known hedge fund run by former Enron traders relocated to Las Vegas for the duration, a confluence that probably sums up the modern financial system for some critics. Methane, a former natural gas trader who is now a senior utility executive, is livid that the New York Mercantile Exchange invoked force majeure at Henry Hub. That means sellers of the natural gas futures contract do not have to deliver to that location due to the hurricane, saving them (and costing contract buyers) the high price of alternative delivery pipelines.

Kotha is a softs trader (sorts are agricultural products, as opposed to metals and energy). He is evasive about his background but concedes that he has some roots in northern India, or possibly Jammu, Kashmir, Pakistan, or even Tibet. Given that no resident of the region seems to agree with any other resident where the borders are, perhaps evasiveness is a good survival trait. He objects to my statement in the book that Fischer Black was strongly opposed to gambling. He claims he saw Fischer with Ed Thorp playing the horses at Saratoga in 1992. Ed was running regressions on a handheld calculator and Fischer was placing the bets, and they were doing very well.

Maybe a dozen other people show up during the course of the evening. Only one player from our group had a money finish in this year's World Series of Poker (considerably more than his entry fee, but not final table). He was supposed to show up about 9 P.M., after a 7 P.M. dinner with some other players at Alto. They ordered the tasting menu, which means they didn't finish dinner until midnight and arrived too cheerful with wine to play. Some modern players are almost puritanical-they treat poker as a competitive sport and would never drink or have fun during a game. No one in our group would play drunk, but no one would play if it weren't fun. We have some conversation beyond smug anecdotes from winners and "shut up and deal" from losers. Players are concentrating on the game, but that does not impede civility.

Nevertheless, none of these people are my friends. I find that hard to explain to non-poker players. It seems obvious to me-why would I want to win money from my friends? There is a mutual respect and some collegial feelings. In some ways I trust them more than my friends (but not in all ways). I certainly do them favors, and I expect favors in return. But even Cao Chong, the player I know best, is somewhere between professional associate and friend. There is a closeness with people you play serious poker against, but there is a distance as well. I was invited to the Alto dinner-something I would rarely pass up, still less when someone else is paying. But I had a quieter meal with non-poker friends at Capsouto Freres, the best restaurant in Manhattan that no cab driver can find. I dislike eating with someone before winning from him, and I dislike more accepting a meal from someone and then losing to her.

Economics

Since I insist on analyzing the economic underpinning of all poker games, I have to apply this tonight. Why are these people here? You have to be a very good player to get in. Why not find an easier game?

It's simplest to see from the perspective of a poker player-like me, for instance. When I started playing seriously in college, I sought out games with the reputation of having good players. I played in easy games to make money, but I also tried to find tough games to measure my ability. Some of it was competitive instinct: If you're good, you want to prove it against other good people. But it was also self-protection. I had to find out if there were better players than me out there. If there were, I wanted to find them when I was alert and looking for them. If I couldn't beat the tough game, I'd stick to easy games and learn to avoid the better players. If I could beat the tough game, I could play with confidence. There's no way to know how good a player you are except by measuring against others. This was even more true in the 1970s, without as much poker theory available and no computer simulators to let you practice, record, and analyze 100,000 hands. This urge to measure myself led me not only to serious games at Harvard, but to Gardena, California, and other commercial poker sites known for top professional play. There is so much randomness in poker that measuring yourself against one other player is impossible. You can only hope to measure yourself within a network or community of players that has demonstrated superior play over hundreds of millions of hands, far more than any one person can play.

The process continues. If you win consistently at one level, one of the other consistent winners will introduce you to a better game. But it doesn't go on forever. In the book and movie The Cincinnati Kid, there is one person, known as The Man, who everyone knows is the best. It doesn't work that way. Of course, you can say there really is The Man, but I was never good enough to learn about her. I can't prove you wrong, but I've played with enough top players over enough years that I'm confident that the process ends at a regional level. In Boston, for example, there were maybe five games I played in at one time or another that were generally considered among the best. There may have been an equal number that I never attended. But there weren't a hundred games of this caliber in the city, and there wasn't one universally acknowledged best game. These games were also the best in New England-the top players from other cities in the region would show up from time to time.

It didn't go any farther than that. The best players in Boston stayed in Boston. They didn't head for Houston or Los Angeles or Las Vegas to get better games. They had jobs or other reasons for staying in the city. Similarly, the best business executives in Boston didn't hang out in Chinatown or in the Italian or African-American parts of town or crash Harvard student games. Mostly people played with people they felt comfortable with. There was some intercourse among these games. As a student, I played in several of them and also visited games in other cities that were supposed to be good. Players from different games, either within the city or from out of town, would show up occasionally. There was enough of this to make it clear that no one game or type of game had a monopoly on good poker. Las Vegas professionals didn't clean out the locals at serious private games, but they didn't get cleaned out, either. The same thing was true of private players on trips to casinos and card rooms.

Serious poker players face a lot of challenges. The games are often illegal. You have to collect debts and avoid being cheated. Poker players are known (or reputed) to carry a lot of cash, which makes them robbery and burglary targets. Sticking together in a poker network helps enormously. You can learn the safe places to play and safe people to play with, and get the introductions necessary to assure other people you are safe. The network can help you collect winnings and avoid legal trouble. Players in commercial establishments have the house to look after them, in ways I will discuss in subsequent chapters. But private game players have to stick together to look after themselves.

The Game

Tonight's game is no-limit Texas Hold 'Em with $25 and $50 blinds. Most people buy in for $5,000 to $20,000. This is not like casino and card room games, where many players make the minimum buy, then buy more chips if they lose, and even switch tables in order to cash chips in if they win (most casinos prohibit selling chips back to the house without leaving the game). There is a mathematical advantage to holding a small stack. If you go all-in, the other players keep betting, with no risk to you. The best hand may fold rather than call a bet made by another player, allowing you to win your pot. When playing in a commercial establishment, some players consider it part of the game to exploit advantages like this. But in most of the serious private games I know, players are expected to put everything they care to risk for the game on the table, and stop playing if they lose it. Most people quit if their stake falls below a convenient playing level-say, $500. There are no formal rules about buy-in amounts or rebuys; the conventions are honored voluntarily. If you like a different kind of game, there are plenty available.

This makes the stakes a little smaller than the same dollar levels in a commercial establishment. You rarely get to an all-in showdown, except when one of the bettors started with a small stack. A relatively high proportion of the time, someone going all-in has an unbeatable hand, so no one else will call. Players do bluff all-in, but if you do it once and get called, you're finished. That's the same as in a tournament, of course, but after losing a tournament you can enter another one or join a side game. In this game, if you're finished, you're finished for the night. If you lose more than rarely, you won't be invited back.

I have noticed that the stakes of the private poker games I play have remained pretty much constant over the years, adjusted for inflation. In college in the mid-1970s, typical buy-ins were $1,000 or $1,500. That grew steadily to the current $5,000, in line with the Consumer Price Index. It might seem odd that as I got richer, I didn't seek higher stakes. There are people playing tonight who measure their wealth in the hundreds of millions and people who don't have a hundred thousand. Nevertheless, we all find this a comfortable stake level. Poker is best when the stake is meaningful, but not so large that fear and greed come into play. The money should focus your mind, not blind you.

People who have a thousand times as much money don't spend a thousand times as much on dinner or clothes or rent. Therefore, $5,000 does mean something to multimillionaires-at least the ones I know-in relation to their everyday decisions. On the other hand, anyone with the poker skill and contacts to get into this game can get her hands on $5,000 somewhere. So the stake does not exclude anyone who would otherwise be invited, but it doesn't bore anyone, either. Gamblers like to ratchet up the stakes as much as possible; serious poker players like to get the stakes just right.

Despite the layoff from poker, I am not rusty. I arrive a little after 8 P.M., buy in for $5,000, and lead the table with $37,500 by 3:30 A.M. No one has left ahead by much, so there's plenty of money in play. I've had a steady increase-one good hand an hour with lower-level breakeven play in between. I haven't been behind all night, nor have I needed exceptional luck on the river. All in all, a near-perfect poker night for me. Then comes the biggest hand, and my last. In the big blind, I'm dealt:

That's not the strongest hand in hold 'em, but it's the most versatile. It has enough high-card strength to form good pairs, two pairs, and trips, plus the maximum number of straight and flush possibilities. If you get a straight, it has to be the highest one unless there's a ten or jack on the board.

Cao Chong is under the gun and bets $500. He gets three callers before it gets to me. This is shaping up to be a strong hand. It's perfect for me. I put up $450 for a pot that totals $2,525. Either the flop will give me at least four cards to a flush or open-ended straight or it won't. If it does, I've got something like one chance in four to win, and possibly win a lot. If it doesn't, I'll fold.

The flop comes down:

This reverses things. Instead of having a drawing hand, one that can improve with the right cards, I've got a strong made hand, two pair. The flop sets up lots of straight and flush possibilities, but no one can have a flush already. It's possible someone has a straight with queen-nine, but that's not a likely hand to make or call a $500 bet (nine-seven is even less likely). There could also be people out there with high pairs, queens or better, that could beat me if any pair shows up on the board. Another worry is a hand like queen-jack that would beat me if another queen comes down. Any pair could turn into trips. With four other players in the pot, there are too many ways to lose if everyone stays in until showdown. But it's quite likely I have the best hand right now and have the advantage over any single player individually.

It's important to contrast this situation to one where I need one card to make a great hand-say I held the ace and another heart with the flop above. In that case, I want to play against as many bettors as possible, since I'll likely beat them all or lose to them all. With the jack-ten that I have, I'll most likely lose to exactly one of the other players. My goal is to get the pot down to zero or one other player-I don't care much which it is. Since the small blind folded, I open the betting, and I go allin. Everyone calls.

That's not as surprising as you might think at first, because there's $2,525 in the pot, and some of the players have small stacks. Methane is holding:

That gives him an open-ended straight draw, three cards to a flush, and a chance of taking it if an ace shows up with another card to form a pair either in his hand or on the board. The straight is the best possibility and on this hand could easily lose to a flush or higher straight. But he has only $1,500, and with everyone else calling, he likes his odds. Another player has a pair of kings and also about $1,500. Kotha thinks his ace/six of hearts is worth betting $3,000.

This, of course, is exactly what I didn't want. Against only these three hands, however, I still have a positive expectation. I have a little better than one chance in three of beating all of them, which gives me an $8,000 profit, versus about one chance in three of losing $3,500 and one chance in three of losing $500 net by beating Kotha but losing to one of the other two.

All this changes when Cao Chong lays down:

Now the only way I can win the hand is if the turn and river cards are the two remaining tens in the deck-1 chance in 741. I have 6 chances in 741 of tying (nine of clubs or diamonds with seven of clubs, diamonds, or spades). None of that happens, and to make matters worse, Cao Chong has the most money of the four of them, a little over $10,000. That gives him over $28,000 and leaves me with $27,000-a $22,000 profit for the night and a good time to walk away.

CHAPTER 4

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